Market hopeful of a rally on backdrop of fall in crude oil prices

MUMBAI: With crude oil prices having corrected by 25% since June to $86/bbl, Dalal Street is sniffing at a rally. In the eight out of 11 occasions since 1991, when Brent crude has corrected by more than 20%, the Indian stock markets have given an average return of nearly 17% in the subsequent three months, data compiled by BofAML since 1991 show. The Indian benchmark index, Sensex, has also outperformed the MSCI Emerging Market Index seven out of 11 times, with an average outperformance of nearly 13%, indicating there\'s a 93% correlation between the Indian stock markets and crude prices. \"We expect markets to extend its rally, as falling crude oil and other commodity prices are most likely to boost the country\'s economic growth,\" said Gautam Trivedi, managing director at Religare Capital Markets. title=\"Market hopeful of a rally on backdrop of fall in crude oil prices\", Market hopeful of a rally on backdrop of fall in crude oil prices Declining crude prices have also raised hopes of interest rate cuts. The NSE Bank Nifty hit a lifetime high of 16,702 points, before closing at 16,667 points on Tuesday, while the BSE Sensex rose 128 points, or 0.48%, to close the day at 26,880. Analysts say the recent cuts in domestic petrol and diesel prices may ease inflation by 50 basis points, while the diesel price deregulation leading to a 5% reduction in prices strengthens the case for a rate cut.

\"Declining crude oil prices, macro indicators, and government\'s economic policies are encouraging for the markets. This makes the case for rates to come down, which could act as a trigger for the Indian markets,\" said Motilal Oswal, CMD at Motilal Oswal Financial Services. Oil marketing companies (OMCs) have gained the most from falling crude prices. Shares of HPCL have rallied by over 62%, BPCL has surged 50%, and IOC has gained 33% over the past six months. \"Direct gainers from lower crude prices are likely to be oil marketing companies such as BPCL, HPCL, IOC, and crude byproduct users like Asian Paints, Dabur, HUL,\" said Jyotivardhan Jaipuria, head of research, Bank of America Merrill Lynch.

\"Lower crude prices also strengthen the case for rate cuts, which are likely to benefit leveraged sectors such as industrials, real estate, banks, and consumer discretionary rate-sensitives such as auto,\" Jaipuria said. Goldman Sachs has slashed its price forecast for Brent crude to $85 a barrel from $100 for the first quarter of 2015, and has said Brent crude could fall further to $80 a barrel in the second quarter, with the US crude dipping to as low as $70 a barrel, citing abundant Supply and lackluster demand. \"Every $1/bbl decline in crude price reduces under-recoveries estimate by Rs 4,600 crore. The decline in under-recoveries would increase upstream PSUs\' net crude realisation. Hence, we reiterate our buy stance on upstream PSUs such as ONGC and Oil India,\" said Dayanand Mittal, analyst at Ambit Capital.